Jan 28 - Fitch Ratings affirms the 'A' rating on the City of McAllen, Texas'
approximately $36.8 million international toll bridge system (the system)
revenue bonds, series 2007A and 2007B. The Rating Outlook remains Stable.
--Volatile Traffic Base With Competitive Pressure: The Hidalgo Bridge is a
mature facility with strong revenue generating capabilities. However, it remains
subject to the macroeconomic conditions of the U.S. and Mexico, drug cartel
violence and increased border crossing regulations/security, as well as to
competition from neighboring international bridges. Higher value commercial
traffic volume remains limited until 2015 when the Anzalduas Bridge is
authorized to accept it.
--Moderate Rate-Making Flexibility: Management has a proven track record of
raising rates as needed to mitigate declining traffic levels; however, the
proximity of competing facilities limits economic rate-making flexibility of the
bridge system to some degree.
--Conservative Capital Structure: Fixed-rate debt with a flat amortization
profile through maturity (2032) is further supported by an adequate level of
--Low Leverage and Healthy Coverage: Strong debt service coverage (3.9 times
in fiscal 2012) from the existing Hidalgo Bridge mitigates the ramp-up and
traffic risk on the new Anzalduas Bridge. In addition, adequate cash reserves
(365 days cash on hand) and moderate leverage equate to a relatively low net
debt-to-cash flow available for debt service (CFADS) ratio of 2.9x with no
additional borrowing anticipated.
--Manageable Capital Expenditure Needs: The Anzalduas Bridge is newly completed
and the Hidalgo Bridge is generally in good condition; funding is predominantly
grant-based and any required matching is covered with bridge system reserves and
a $0.25 set-aside from the June 2011 toll increase.
WHAT COULD TRIGGER A RATING ACTION:
--The return of sizeable declines in passenger traffic or toll revenue levels
driven by violence related to drug cartels and/or a considerable contraction of
the manufacturing industry and cross-border trade;
--Changes in key financial metrics such as coverage and liquidity resulting from
management's reluctance to raise tolls as planned/needed or its inability to
control operating and maintenance (O&M) expenses;
--Meaningful additional leverage.
The outstanding revenue bonds are secured by a first lien on and pledge of net
revenues of the toll bridge system.
Total crossings have declined over the past five fiscal years at a compound
annual growth rate (CAGR) of 4.3%, but were down just 1% in fiscal 2012 to 5.4
million crossings. Prior year declines were the result of concerns over safety
following the cross-border violence, the weakened economy, and, to a lesser
extent, the toll increases in fiscals 2008, 2010, and 2011. Notably, however,
passenger traffic was flat in fiscal 2012 with most of the decline coming from
pedestrian traffic. This could indicate that a bottom has been reached.
Supporting this is the fact that both vehicular and pedestrian transactions are
up over 5% for the first two months of fiscal 2013.
Commercial traffic is now practically non-existent and passenger vehicles
represent the majority of the transactions (72%) with pedestrians accounting for
the rest (28%). As a result, passenger traffic accounts for approximately 89% of
toll revenues and pedestrian traffic the rest. Fitch expects a shift in this
traffic profile once commercial traffic is allowed on the Anzalduas Bridge in
2015; however, the impact on traffic and revenue remains uncertain. Should
material passenger volume declines return, negative rating action could be
Toll revenues grew by 13% in fiscal 2012 continuing the rebound of 2.5%
experienced in fiscal 2011. This growth is despite the recent toll increases and
declines in transactions. After raising tolls by $0.25 in fiscal 2010,
management implemented a $0.50 increase in fiscal 2011 to proactively mitigate
the loss in traffic. Further, $0.25 of the $0.50 raise is being transferred to a
capital improvement fund for future system improvements. Fiscal 2012 was thus
the first full fiscal year of the passenger toll increase and transactions were
nearly flat indicating a lower price elasticity and improving conditions in the
area. Management also instituted a new tolling structure for two-axle commercial
vehicles, increasing the toll to $7 from $3 in April 2012 which further
supported the revenue growth. Overall, management has been able to grow toll
revenues over the past five years (CAGR of 3.9%) in the face of declining
Expenses have grown over the past couple of fiscal years as the Anzalduas Bridge
was being brought on line, but have stabilized in fiscal 2012. O&M expenses
appeared to increase by 9.9% over fiscal 2011, however, this was primarily
related to an increase in maintenance expenses that were directly passed-through
and recouped in the form of increased rental income. This has a cash flow
neutral effect and is expected to continue going forward. Management indicated
that most of its expenses are now fixed and that there should be little variance
going forward, even when commercial traffic returns to the system. Fitch views
this cost containment as difficult to sustain over the long term and has modeled
4%-5% annual growth in operating expenses in its base and stress cases, more in
line with historical results.
Given that expense growth was in line with expectations and traffic exceeded
budget, the impact of toll increases improved debt service coverage to 3.9x in
fiscal 2012. Going forward, Fitch expects management to maintain high coverage
levels, especially when commercial traffic adds to the toll revenue base
beginning in 2015. Fitch views this level of cushion as necessary given the
volatility in the traffic base that is tied to the performance of the
maquiladora industry in Mexico and border security threats.
Capital expenditure needs are modest given the recent completion of the
Anzalduas Bridge and the good condition of the Hidalgo Bridge. Several projects
to improve efficiency are in the pipeline and funding is predominantly
grant-funded with a 20% match required of management. Money is already set aside
for these projects and the $0.25 set-aside from the toll increase should enhance
the system's ability to undertake additional projects in the future.